Refer to the graph. If the economy is initially at equilibrium at the intersection of AD1 and AS1 and there is a tax cut, then, from a skeptical mainstream perspective, the immediate impact is that
Aggregate
A) demand would increase to AD $\mathrm { AD } _ { 2 }$ and aggregate supply would increase to A $\mathrm { AS } _ { 2 }$
B) demand would increase to AD $\mathrm { AD } _ { 2 }$ and aggregate supply would remain at A $\mathrm { AS } _ { 1 } .$
C) supply would increase to A $\mathrm { AS } _ { 2 }$ and aggregate demand would remain at AD $A D _ { 1 }$
D) demand would remain at AD $A D _ { 1 }$ and aggregate supply would remain at A $\mathrm { AS } _ { 1 }$

Question

Refer to the graph. If the economy is initially at equilibrium at the intersection of AD1 and AS1 and there is a tax cut, then, from a skeptical mainstream perspective, the immediate impact is that
Aggregate
A) demand would increase to AD $\mathrm { AD } _ { 2 }$ and aggregate supply would increase to A $\mathrm { AS } _ { 2 }$ 
B) demand would increase to AD $\mathrm { AD } _ { 2 }$ and aggregate supply would remain at A $\mathrm { AS } _ { 1 } .$ 
C) supply would increase to A $\mathrm { AS } _ { 2 }$ and aggregate demand would remain at AD $A D _ { 1 }$ 
D) demand would remain at AD $A D _ { 1 }$ and aggregate supply would remain at A $\mathrm { AS } _ { 1 }$

Quizplus · Accepted Answer

A tax cut would increase disposable income and therefore increase consumption, leading to a shift in the Aggregate Demand curve to the right (AD1 to AD2). However, in the short run, aggregate supply is likely to remain constant (AS1) as firms may not have enough time to adjust to the increase in demand. Therefore, the economy would move to the new intersection of AD2 and AS1, resulting in a higher equilibrium quantity and price level. From a skeptical mainstream perspective, the immediate impact of the tax cut would be limited to the AD curve.

Refer to the Graph AD2\mathrm { AD } _ { 2 }AD2​

Refer to the Graph $\mathrm { AD } _ { 2 }$